North American Investment Grade CDS Index 86.26 -1.03%
European Financial Sector CDS Index 159.77 bps +10.83%
Western Europe Sovereign Debt CDS Index 186.67 bps +3.84%
Emerging Market CDS Index 210.99 bps -.06%
2-Year Swap Spread 23.0 -1 bp
TED Spread 20.0 unch.
Economic Gauges:
3-Month T-Bill Yield .10% unch.
Yield Curve 274.0 +3 bps
China Import Iron Ore Spot $169.60/Metric Tonne +.30%
Citi US Economic Surprise Index +17.40 -.4 point
10-Year TIPS Spread 2.28% unch.
Overseas Futures:
Nikkei Futures: Indicating +89 open in Japan
DAX Futures: Indicating +30 open in Germany
Portfolio:
Slightly Higher: On gains in my Tech, Ag and Retail long positions
Disclosed Trades: None
Market Exposure: 75% Net Long
BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite recent stock gains, rising eurozone sovereign debt angst, Korean peninsula concerns and weakness in some overseas equity markets. On the positive side, Gaming, Education, REIT, Homebuilding and Coal shares are especially strong, rising more than 1.0%. (IYR) has outperformed throughout the day. Lumber is rising another +1.8% and copper is rebounding another +1.02%. The 10-year yield is stable. On the negative side, Construction, Steel, Defense and Road & Rail shares are relatively weak today, falling more than .5%. The Greece sovereign cds is climbing +2.84% to 997.50 bps, the Spain sovereign cds is climbing +2.51% to 340.11 bps, the Russia sovereign cds is gaining +2.22% to 147.90 bps and the China sovereign cds is surging +7.9% to 73.2 bps. The Euro Financial Sector CDS Index is soaring to the highest level since late June and the Western Europe Sovereign CDS Index is very near its record high set last month, which is also a big negative. Short/intermediate-term gauges of investor sentiment remain overly bullish. US stocks remain extremely resilient, which is a large positive. I am surprised that equity investors aren't yet more concerned about what is going on in Europe. Seasonality, diminishing attacks from Washington on business and better US economic data are trumping euro concerns so far. If European debt fears calm early next year, then stocks should make another meaningful push higher. However, we are likely now at the point that if the euro situation continues to deteriorate it will lead to a significant adverse impact on equities in 1Q. I expect US stocks to trade modestly lower into the close from current levels on China inflation worries, profit-taking, more shorting and rising eurozone debt fears.
ECB Expresses 'Serious Concerns' About Irish Proposals to Stabilize Banks. The European Central Bank said it has “serious concerns” that Ireland’s new banking legislation may threaten the central bank’s independence and its ability to run liquidity operations. “The ECB has serious concerns that the draft law is insufficiently legally certain,” the central bank said in a position paper dated Dec. 17, published on its website. The Irish law should not hurt the ability of euro-region monetary authorities “to enforce their rights including, without limitation, the enforcement of security over any eligible collateral posted by any relevant institution.”
Euro Falls a Second Day on Concern Region's Crisis to Spread; Dollar Gains. The euro weakened on speculation some European nations will struggle to raise funds amid the region’s debt crisis after rating companies downgraded the creditworthiness of Ireland and considered additional cuts. The single currency depreciated versus 15 of 16 major counterparts, falling to two-week lows against the dollar and the yen as Moody’s Investors Service downgraded two Dublin-based lenders to junk status. Costs to insure French government debt rose to a record, indicating the nation may be at risk of losing its top rating.
Chinese Iron-Ore Imports May Fall in 2011 on Price, Arctic Says. Martin Sommerseth Jaer and Erik Nikolai Stavseth, analysts with Arctic Securities ASA in Oslo, comment on Chinese iron-ore imports in an e-mailed note today. China is the biggest iron-ore consumer and more of the steelmaking material is carried at sea than any other dry-bulk good. “Going into 2011, several Chinese sources are claiming that Chinese iron-ore imports will decline as prices rise too fast. In July 2009, 69 percent of all iron-ore purchases were imports, whereas the percentage had dropped to 40 percent in July 2010 -- due to the rapid escalation in iron-ore prices.”
The Baltic Dry Index, a measure of commodity-shipping costs, fell to its lowest level in more than four months as ship deliveries and the end of the grain season sent hire-rates lower. The index declined 44 points, or 2.2%, to 1,955 points today. That's the lowest since July 29 and the biggest drop in the current 10-session slide. Rents for panamaxes, the second-biggest vessels tracked by the gauge, led the way with a 4.1% decline to $15,621 a day, the lowest price since May 2009.
U.S. Commercial Property Rises for Second Consecutive Month, Moody's Says. U.S. commercial property prices rose 1.3 percent in October from the previous month, the second consecutive monthly gain, Moody’s Investors Service said. The Moody’s/REAL Commercial Property Price Index climbed 3.2 percent from a year earlier, Moody’s said in a report today.
Commodities Rally Falters in Currency Futures as History Shows Dollar Wins. Speculators betting the commodities rally will continue into a third year are being confronted by currency investors wagering the dollar will strengthen in 2011. If history is any guide, the foreign-exchange market will win. Traders have almost tripled their net-long positions in 20 raw-material futures the past five months to the highest level in at least four years, driving a 26 percent gain in the Thomson Reuters/Jefferies CRB Index, government data show. Contracts on the dollar strengthening against the euro have climbed to a three-month high. The U.S. currency moved in the opposite direction of commodity prices 18 of the past 22 quarters, according to data compiled by Bloomberg.
First-Time Solar Producers May Imperil India's Push for Renewable Energy. India’s first solar auction, planned to boost clean energy in the world’s fourth-biggest polluter, may risk failure after winners were selected without experience or proof that they can keep projects afloat earning low margins. A woolen yarn maker, an animation company and an industrial pipes supplier with no experience building power plants were among 37 winners of the government auction announced Dec. 13. The lowest bidders quoted prices that mean they may struggle to earn an attractive profit, said Bloomberg New Energy Finance analyst Bharat Bhushan.
Municipal Budget Cuts May Reduce U.S. GDP, Goldman Sachs Says. Lower state and local spending, which accounts for 12 percent of the national economy, may reduce U.S. gross domestic product growth by about half a percentage point next year, Goldman Sachs Group Inc. said. Municipal budgets will likely increase by no more than 1 percent in 2011 after adjusting for inflation as local governments receive less state aid and home-price declines put a drag on property-tax collections, the bank said in a note to clients. That is about 2 percentage points less than average. “State and local governments will continue to face substantial budget pressures for the time being,” wrote Andrew Tilton, a New York-based economist, in the Dec. 17 note.
AmEx Falls as Credit-Card Fees May Be 'Next Target'. American Express Co. fell the most in the Dow Jones Industrial Average after Stifel Nicolaus & Co. said proposed federal caps on debit-card fees may be followed by similar cuts for credit cards. The shares dropped $1.93, or 4.4 percent, the most in more than two months, to $42.08 at 2:06 p.m. in New York Stock Exchange composite trading.
Wall Street Journal:
Hynix Chief Says Chip Price Plunge to Hit Earnings. Hynix Semiconductor Inc.'s chief executive expects computer-memory chip prices to continue to fall early next year and hit the company's fourth-quarter result, as the short-term outlook for the global chip market remains grim. "Chip prices remained strong until the first half of this year, but they dropped sharply, especially during the fourth quarter," Chief Executive O.C. Kwon said in a recent interview.
Online Ads Pull Ahead of Newspapers. This year, for the first time, advertisers will have spent more on Internet ads than on print newspaper ads, according to new estimates from eMarketer. The digital-marketing research firm says U.S. spending on online ads will hit $25.8 billion, surpassing the $22.8 billion spent on print ads in newspapers.
S&P Could Revise One-Third of Muni Note Ratings Lower. Standard & Poor's Ratings Services is seeking comment on proposed revisions to rating a form of municipal note that allows state and local borrowers to temporarily raise short-term funds backed by a promise to repay with a future bond issue.
The Bennie Who Stole Christmas. (graphs) Ben Bernanke is a highly educated PhD from Princeton who has never worked a day in the real world since he graduated from college in 1975. His entire life has been spent in the ivory tower of academia surrounded by models and theories that work perfectly in the comfort of his office. After building his reputation as an “expert” on the Great Depression by studying it and reaching the wrong conclusions, he came down from his ivory tower in 2002 to join an organization that has systematically destroyed the value of the US currency, thereby undermining the well being of the once vibrant middle class.
Credit Default Risk of Germany Reaches New High. Debt protection costs rise across eurozone peripherals. The cost of insuring against a German government default on its debt has reached a new high for the year, with credit default swaps (CDS) rising from 56 basis points at end of trading on Friday, December 17 to 57bp at 1.00pm London time today. Greece saw its CDSs fall from 989bp to 952bp, but otherwise CDSs on peripheral eurozone debt rose over the weekend. Five-year CDSs on Portugal increased from 469bp on Friday to 479bp today. The cost of insuring against an Irish default rose marginally from 581bp to 583bp over the same period. Meanwhile CDSs on Italian sovereign debt widened from 204bp to 212bp. The cost of default insurance against Spanish debt increased from 333bp on Friday to 345bp today, while CDSs on Hungary crept up from 375bp to 378bp, according to data provider Markit. Today, Moody's announced its decision to downgrade the ratings of several Irish financial institutions, including Allied Irish Bank and Bank of Ireland. This follows its downgrade of Irish government bond ratings from Aa2 to Baa1 on December 17.
Rasmussen Reports:
For First Time Ever, Most Voters Think Health Care Repeal Likely. A new Rasmussen Reports national telephone survey finds that 52% of Likely U.S. Voters think it is at least somewhat likely that the health care plan will be repealed. Thirty-three percent (33%) view repeal as unlikely. Those figures include 16% who believe repeal is Very Likely and 5% who believe it is Not at All Likely. Fifty-five percent (55%) of voters now favor repeal of the health care law, including 40% who Strongly Favor it. Forty-one percent (41%) are opposed to repeal, with 31% Strongly Opposed. Support for repeal has ranged from 50% to 63% in weekly tracking since the bill became law in late March.
Reuters:
Hedgebay Debuts Tool to Value Fund "Side Pockets". Hedgebay, a secondary market for hedge fund stakes, has launched a tool to help investors value the billions of dollars worth of illiquid assets still held in opaque "side pocket" portfolios left over from the credit crisis. An estimated 10 percent of funds in the $1.8 trillion hedge fund industry still have so-called side pockets, according to Hedgebay co-founder Elias Tueta, referring to separate portfolios created by hedge funds during the crisis to house hard-to-shift assets.
ECB Wants Liquidity Included in New Stress Tests. The European Central Bank is backing the European Commission to include a liquidity criterion in the new round of euro zone bank stress tests next year, but they face opposition from Germany, EU sources said. EU leaders agreed on a new round of stress tests last week as part of Europe's efforts to win back confidence of financial markets, but detailed criteria of the tests are to be agreed only in January. The tests themselves are to start in February.
Raytheon(RTN) to Pay $490 Million for Applied Signal(APSG). U.S. defense contractor Raytheon Co (RTN.N) said it would pay $490 million to acquire cybersecurity firm Applied Signal Technology Inc (APSG.O), which makes equipment that militaries and governments use to detect threats.
France's AAA Grade at Risk as Rating Cuts Spread. France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said. Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Credit default swaps show it’s more expensive to insure Belgian, French and Austrian bonds than lower-rated securities from Chile and the Czech Republic. “Every sovereign may get penalized in the year ahead,” said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London. “It would a big deal if France was to have its AAA rating stripped. I don’t think the likelihood of a downgrade is reflected in the market.” “If problems in the euro zone aren’t solved quickly, then the conditions of refinancing will be expensive for these countries and the ratings agencies will do more downgrades,” said Ralf Ahrens, who helps manage about $20 billion as head of fixed income at Frankfurt Trust. “We already see these dynamics in the market. I see France as a risk.”
Europe Company Debt Spreads Above U.S. as Growth Diverges: Credit Markets. European high-grade company bonds are trading at their cheapest levels ever relative to U.S. debt as the region’s deficit crisis widens at the same time borrowers in America are enjoying a resurgent economy. Investment-grade euro-denominated bond yields average 189 basis points more than government debt, compared with a spread of 169 for U.S. corporate debentures, Bank of America Merrill Lynch index data show. The 20 basis-point difference between Europe and the U.S. matches a record reached on Dec. 15. Investors are downgrading the outlook for European companies dependent on government spending as budget cuts and job losses increase at the same time retail sales, consumer confidence and industrial production rise in the U.S. Bonds of Italian utility Enel SpA are the worst performers this month among the 50 biggest issuers in Bank of America’s EMU Corporate Index. “The big change is that there’s a lot of fiscal tightening in Europe,” said Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co. in Newport Beach, California, manager of the world’s biggest bond fund. Europe will suffer “lower animal spirits, lower spending, lower hiring,” he said. The extra yield investors demand to own investment-grade bonds in euros widened 2 basis points this month, Bank of America Merrill Lynch’s EMU Corporate Index shows. In the same period, U.S. spreads tightened 13 basis points.
German Ifo Export Climate Index Fell in December, WiWo Says. The Ifo economic institute’s export climate index fell to its lowest in almost a year this month, Wirtschaftswoche magazine reported. While export contracts at goods-producing companies were “slightly” up, expectations had already “considerably” declined in November, the magazine said, citing the index it commissioned. The index fell for a seventh straight month, the magazine said.
Coffee Surges to 13-Year High in New York on Supply Concern, Fund Buying. Futures have surged 66 percent this year, heading for the biggest annual gain since 1994. “There is a lot of fund buying,” said Rodrigo Costa, the vice president of institutional sales at Newedge USA LLC in New York. “The fundamentals are very supportive.”
U.S. Sugar Corp. Says Florida Cane Crop Is 'Severely Damaged' by Freeze. U.S. Sugar Corp. said five nights of freezing Florida weather in the past 10 days “severely damaged” a cane crop already hurt by a “record-smashing” deep freeze in January. “These multiple hard freezes impacted 100 percent of our sugar cane crop,” Judy Sanchez, a spokeswoman at the Clewiston, Florida-based company, said today in a statement. “The impacts could be devastating, not only to U.S. Sugar, but also to the smaller, independent cane farmers in the area.” About 60 percent of the mature crop hasn’t been harvested, and new plants faced temperatures “significantly below” 28 degrees Fahrenheit (minus 2.2 Celsius) for four hours, Sanchez said. Most of the company’s 150,000 cane acres (60,700 hectares) were hit by temperatures of 32 degrees or lower for as long as 12 hours, according to the statement. Temperatures were below freezing in Palm Beach County, the state’s main sugar-producing county, for less than 12 hours, said David Salmon, a meteorologist at Weather Derivatives in Belton, Missouri.
Derivatives Rules Increase Risks in Nascent Market for Swaps: China Credit. Rules governing credit-default swaps in China are too narrow, hindering their growth and distorting prices at a time when the corporate bond market is expanding 45 percent, according to bankers. About 23 agreements covering a notional 1.99 billion yuan ($298 million) have been sold since China set up a credit derivatives market a month ago, according to the central bank.
New Jersey's Christie Says 'Day of Reckoning' Has Come for State Budgets. New Jersey Governor Chris Christie said U.S. states face a “day of reckoning” as they contend with looming budget deficits in the wake of the longest recession since the 1930s. Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be “unsustainable.” Benefits, education and health care will be reduced in many states, he said. “The day of reckoning has arrived, that’s it. And it’s going to arrive everywhere,” Christie, 48, a first-term Republican, said during an interview on CBS Corp.’s “60 Minutes” program. Areas such as education and pensions “were third rails of politics. We are now left with no alternatives.”
Hedge Fund Bullish Gas Bets Collide With Dropping Prices: Energy Markets. Hedge funds raised bullish bets on natural gas to a four-month high just as weather warmed, pushing heating fuel to its biggest weekly decline since August. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 7 percent in the seven days ended Dec. 14 to the highest level since August, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. While forecasts for cold weather in the eastern and central U.S. and dropping stockpiles drove futures up 4.9 percent to $4.606 per million British thermal units on Dec. 8, the outlook changed, causing prices to fall 8 percent for the week. Natural gas may fall again this week as warmer weather limits demand, a Bloomberg News survey showed Dec. 17.
China Stalls UN Efforts as South Korea Prepares Drill. United Nations Security Council efforts to calm tensions between North and South Korea were stalled as China refused to support a resolution condemning the North for a Nov. 23 attack on a South Korean-held island. China declines to join a majority of the Security Council members in condemning the North Korean attack, according to a diplomat present at the meeting who spoke with reporters on condition of anonymity.
Yields Flatten QE2 Critics With Curve Showing Fed End to Stimulus in Sight. Government bonds are falling the most in a year as the gap between yields on longer-term Treasuries show that the Federal Reserve’s second round of quantitative easing may be its last. The difference between 10- and 30-year yields shrank to 1.05 percentage points, or 105 basis points, on Dec. 15 from a record 1.60 points on Nov. 10, the fastest contraction since the 1980s, according to data compiled by Bloomberg. The shift in the so-called yield curve is taking place as Bank of America Merrill Lynch index data show U.S. bonds due in 10 years or more lost 4.64 percent this month, trimming 2010’s gain to 8.37 percent. Flattening usually foreshadows the end of Fed interest-rate cuts aimed at stimulating growth.
Aussie Leads 'Extreme' Currencies Deutsche Says Avoid. In the last two years there has been no better place for foreign-exchange investors than in nations whose economies are tied to commodities. Now the rally has left those currencies at least 9.5 percent overvalued based on the relative costs of goods and services as measured by the Organization for Economic Cooperation and Development.
Wall Street Journal:
The FCC's Threat to Internet Freedom by Robert M. McDowell.'Net neutrality' sounds nice, but the Web is working fine now. The new rules will inhibit investment, deter innovation and create a billable-hours bonanza for lawyers. Tomorrow morning the Federal Communications Commission (FCC) will mark the winter solstice by taking an unprecedented step to expand government's reach into the Internet by attempting to regulate its inner workings. In doing so, the agency will circumvent Congress and disregard a recent court ruling. How did the FCC get here?
Auditors Face Fraud Charge. New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books. New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.
Insider Trading Case Could Grow. A key cooperating witness working for the U.S. in a major insider-trading investigation made more than 60 calls with corporate managers, seeking to gather evidence for the government, a person familiar with the probe says. The activity by the witness—who was identified by prosecutors in a complaint unveiled Thursday only as "CW-2"—suggests that the insider-trading investigation could grow significantly from the initial charges.
Firing Drill Increases Tensions in Korea. South Korea on Monday morning prepared to test artillery from an island North Korea attacked last month, and ordered residents into bomb shelters in case the North carried out on threats to open fire at the drill.
The Weak Get Weaker as Muni Bonds Are Sold Off. Amid the recent selloff in the municipal-bond market, investors are increasingly differentiating between state and local governments with strong finances and those facing big fiscal woes. That trend could have significant implications for holders of bonds issued by weaker state and local governments, some of which are already paying higher interest rates and have seen the prices of their bonds decline in value. The growing gap between what the strongest and weakest government issuers pay to borrow brings unpleasant echoes of the European debt crisis.
Tax Break May Spur Business Spending, Hiring. One small provision in the new tax law could spur big-ticket business spending — and if a government analysis proves correct, bolster hiring. The "100% expensing" policy allows businesses in 2011 to fully write off "productive capital investments" such as delivery trucks, machines and aircraft rather than depreciate the cost over a period of years. With the immediate write-off, firms will have lower taxable income and more money to spend. A Treasury Department analysis estimates 2 million companies will take advantage of it.
SNB President Philipp Hildebrand told the Swiss government during an annual confidential meeting that he's concerned over the euro crisis, citing people familiar with the talks. In a worst-case scenario, the euro could crash and the Swiss franc would soar, Hildebrand said. That could lead to "devastating" consequences for the Swiss export industry.
People's Daily:
China's inflation may exceed 5% to 6% in some months next year, citing Ba Shusong, a researcher at the State Council's Development Research Center.
The Standard:
Hong Kong Property Sales May Drop 20% Next Year. New applications and property sales are set to drop by 20% next year because of the cooling measures introduced by the government, citing Hang Seng Bank Ltd. Executive Director William Laung Wing-cheung.
Weekend Recommendations Barron's:
Made positive comments on (ITW).
Citigroup:
Reiterated Buy on (CHKM), raised target to $32.
Night Trading
Asian indices are -1.25% to -.50% on average.
Asia Ex-Japan Investment Grade CDS Index 106.0 +2.0 basis points.
Asia Pacific Sovereign CDS Index 105.0 -.5 basis point.
The Chicago Fed National Activity Index for November is estimated to rise to 0.0 versus -.28 in October.
Upcoming Splits
(AME) 3-for-2
Other Potential Market Movers
The (GENZ) Investor Event and (HANS) Investor Meeting could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by technology and real estate shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 75% net long heading into the week.
BOTTOM LINE: I expect US stocks to finish the week mixed as diminishing economic fear, seasonal strength, buyout speculation, investment manager performance anxiety and short-covering offsets profit-taking, rising sovereign debt angst and China inflation worries. My intermediate-term trading indicators are giving mostly bullish signals and the Portfolio is 75% net long heading into the week.
